Why investors ignore the opportunities in India at their peril

There has been a lot of focus on China as a significant emerging market player. But India is set to prove the doubters wrong over the coming decade, writes John Pereira.

Australian investors and advisers are still reticent when it comes to India. But while we wonder if it can live up to our expectations, India has dusted itself off from the global financial crisis (GFC) with increased savings and investment rates, no debt and a sound platform, which could see it surpass China in terms of growth in a few years. Is it just potential?

India may not be as well developed or have the same infrastructure and influence as China — yet — but India trumps China on several counts: its youth (known as the “demographic dividend”); its entrepreneurial spirit; its domestic consumption; and its status as a genuine democracy.

The last point may have slowed India from time to time, but is still a critical factor in the overall character of this market.

A difficult market

There are many stories of investors and businesses who have committed time and money to India, only coming away somewhat poorer.

Our major banks, for example, went into India too early and with the wrong expectations — they are now returning with a better business model.

This is not an easy country to succeed in. You need more than the usual local knowledge and the ability to drill down to find out what is real. But the rewards are there for those prepared to do the solid homework.

There are also the usual risks involved with investing offshore. But it’s fair to say India’s opportunities at present clearly outweigh its risks.

Especially given that India’s biggest potential risk, regulatory risk, has diminished following the re-election of pro-reform Prime Minister Manmohan Singh in 2009 for a five-year fixed term.

Currency risk is a perennial hazard in emerging markets investment, and a strong Australian dollar has taken the shine off some strong market performance in India.

But there will be times that investors benefit from currency fluctuations, and where currency fluctuations can be considered an extra layer of diversification.

A star diversifier

Doubters may wish to consider India’s role in a diversified portfolio. India is an economy that is not overly reliant on any one sector, offers broader sector exposure than the Australian market and is home to some of the world’s largest and fastest growing companies.

The power of diversifying into emerging markets was amply demonstrated by performances over the last decade: the ASX 200 Index rose by 57 per cent, while among overseas markets, India’s BSE 200 Index rose by 243 per cent and in the USA, the S&P 500 Index posted a return of minus 23 per cent (all figures from 1 January, 2000 to 31 December, 2009).

Back in the year 2000, it would have been incredible to think that India would massively outperform the USA but that’s exactly what happened as India’s GDP per capita more than quadrupled.

But the reasons behind the growth are the most fascinating aspect of India.

A different growth recipe

India’s recipe for growth is unique and powerful, spiced by the following mix:

1. A young, billion-plus population: half of which are under 25, ambitious, increasingly educated and mobile.
2. Little debt: India is considered debt free, the polar opposite of the world’s developed economies that will be saddled with debt problems for some time.
3. High savings rates: Just like China, the Indian population is a nation of savers, but unlike China they are not totally inhibited with their spending, making the savings rates a genuinely positive economic force.
4. High investments rates: India now saves and invests around 34 per cent of GDP, a huge number by any standards.
5. Strong domestic demand: Domestic consumer demand is one of India’s great strengths; it has helped to insulate it from the worst of the world’s troubles, and is the product of a vibrant consumer market.
6. Pro-reform government: India is still early in the second term of a government which is determined to liberalise its economy, create stronger global relationships and address perennial challenges such as infrastructure and investment.

As India is only 20 years into its reforms, investors may wish to compare India now to the United Kingdom’s development in the 19th century, and the USA’s growth in the 20th century.

Being so early in its development explains why its economy has been able to sustain huge growth rates for so long, and why it still has a huge amount of growth to come.

Access

Accessing India’s growth remains difficult: in contrast to China, there are few opportunities for Australians to participate, but I look forward to the day when there is as much local investment interest in India as there is in China, and that the product offering follows suit.

I hope to see greater diversity in product, beyond large cap listed stocks on the Indian exchanges, to also include unlisted funds, hybrid investments, private equity and property opportunities.

A decade to watch

This decade we will start to see the spoils of financial deregulation and the liberalisation of the Indian economy under Prime Minister Singh.

Pleasingly, a lack of debt combined with large foreign exchange reserves means India is probably better placed to handle external financial shocks than it has been before.

It should be a decade of growth, flowing through to returns for astute managers. Indian Finance Minister, Pranab Mukherjee said recently that India may reach double figure GDP growth rates for the first time during the next five years, and the International Monetary Fund has also said it expects India’s economic growth to accelerate and inch closer to that of China.

The recovery of its markets last year shows just how strong India’s investment returns can be. India’s Sensex Index has made around 144 per cent following its March 2009 lows, and is delivering nearly 80 per cent for the year.

There are sure to be ups and downs, but investors have a brilliant opportunity to still get in early on one of the world’s great growth stories.

John Pereira is managing director of Atlas Capital Management and president of the Australia India Business Council (Victoria).